02/06/2018

Institutional investors aren't as reliant on proxy advisers to make voting decisions as some business groups and other critics might think, according to a new survey by consultancy Morrow Sodali Global LLC.

Most of the close to 50 investors surveyed said recommendations from firms like Glass Lewis & Co. and Institutional Shareholder Services Inc. have a “low influence” on how they vote at annual meetings for companies they own. The next most common answer in the survey, released Jan. 30, was “medium influence.”

Only 5 percent of respondents told Morrow Sodali that the proxy firms’ advice has a “high influence” on their votes. The investors surveyed manage a collective $31 trillion in assets and include both active and passive fund managers.

I don't think we should put much faith in that finding. It's a very small sample. It's based on self-assessment, which is inherently suspect. (After all, how many institutional investors are likely to say "I just do what ISS tells me to do because I'm just that stupid"?)

Evidence exists that ISS's views are the most important determinants of the outcomes in say-on-pay votes. Cotter et al., supra note 173, at 981 (summarizing findings that ISS recommendations had a “significant” effect on say-on-pay votes); id. at 989 (observing that an “against” recommendation from ISS “overshadow[s]” other performance factors such as the growth of CEO pay); id. at 1001 (describing trends suggesting ISS's influence on say-on-pay votes is increasing); Holly J. Gregory, Lessons for the 2015 Proxy Season, Prac. L. (Sept. 1, 2014), http://us.practicallaw.com/4-578-4485 [http://perma.cc/8XRK-A4YL] (“It appears that ISS negative vote recommendations based on the perceived lack of board responsiveness to shareholder concerns (as evidenced by the failure to implement a successful shareholder proposal) was the leading factor associated with directors who failed to receive a majority of votes cast in an uncontested election in 2014.”); U.S. Gov't Accountability Office, GAO-17-47, Corporate Shareholder Meetings: Proxy Advisory Firms' Role in Voting and Corporate Governance Practices 16 (2016), http://www.gao.gov/assets/690/681050.pdf [http://perma.cc/DT2J-P7P3] (describing studies suggesting that “proxy advisory firm recommendations are the key determinant of voting outcomes in the context of mandatory ‘say-on-pay’ votes”). Even a study that purports to show that proxy advisor recommendations are notasinfluential as some contend finds that the advisors drive 6 to 10% of the vote. See Stephen Choi et al., The Power of Proxy Advisors: Myth or Reality?, 59 Emory L.J. 869, 906 (2010). Tellingly, negative recommendations by ISS often do not reflect changes in the pay plan-- which ISS would have supported in prior years--but rather the company's current performance, making the vote less about the pay plan and more about expressing general unhappiness with the company's stock price. See Ryan Kraus et al., When Do Shareholders Care About CEO Pay?, Conf. Board 4 (2013), http://www.conference-board.org/retrievefile.cfm?filename=TCB_DN-V5N16-131.pdf&type=subsite [http://perma.cc/LK6V-SGDV] (“Our results provide clear evidence that shareholders, even those acting in the role of institutional shareholders, only weigh their own losses when deciding whether to approve a SOP ballot.”). There is evidence that the influence proxy advisors have over say-on-pay votes extends more broadly. SeeU.S. Gov't Accountability Office, supra, at 15 (“Recent studies, market participants, and other stakeholders agree that proxy advisory firms have influence on shareholder voting and corporate governance practices, but had mixed views about the extent of their influence.”).